GigaMedia Limited (GIGM) Q3 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the GigaMedia Q3 2012 earnings call. At this time all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]. I must advise you that this conference is being recorded today, Tuesday, the 27th of November 2012. I would now like to hand the conference over to your first speaker today, Mr. Brad Miller. Thank you. Please go ahead.

Thank you. This is Brad Miller, Investor Relations Director of GigaMedia. Welcome to our conference call to discuss GigaMedia's third quarter 2012 financial results. With me today are Collin Hwang, CEO, and Dirk Chen, CFO. Before we begin, I would like to remind you that a number of forward-looking statements will be made during this conference call. Forward-looking statements are any statements that are not historical facts. These forward-looking statements are based on the current expectations of GigaMedia and there can be no assurance that such expectations will prove to be correct. Because forward-looking statements involve risks and uncertainties, GigaMedia's actual results could differ materially from these statements. Information about factors that could cause and in some cases have caused such differences can be found in GigaMedia's annual report on Form 20-F filed with the US Securities and Exchange Commission in April 2012. This presentation is being made on November 27, 2012 in Taiwan. The content of the presentation contains time-sensitive information that is accurate only as of the time hereof. If any portion of this presentation is rebroadcast, retransmitted or redistributed at a later date, GigaMedia will not be reviewing or updating the material that is contained therein. After today's prepared remarks, we will respond to questions we've received by email and also take live questions. With that, I'd like to turn the call over to our CEO, Collin Hwang.

Hello, everyone. Thank you for joining us. Let me start by saying that I'm honored by the Board's confidence in me and very excited to be taking on my new role here as CEO. As outlined in the announcement today, I've gone familiar with the company, going turnaround, and its great potential from working with the team as a consultant this year. Giga's turnaround plans have been working. Today the company announces it hit its milestone in the quarter, positive cash flow from operations, we are all grateful for John's work in reshaping and strengthening the company and making this happen. And we are committed to driving further progress and delivering increased shareholder value. I see a number of opportunities in front of us that will get us there. You'll be hearing more from me soon about our plans going forward and the pace of change we expect. Obviously, I cannot provide a detailed plan today given that I have just taken on my new role. Nevertheless, I can share with you this general vision. We expect to continue refining and transitioning Giga's online game business to better capture market opportunities. We expect to continue developing our cloud service business, which I have been involved with since its inception in early 2011. Finally, we expect to use some of our cash to make accretive acquisitions. We look forward to sharing more with you going forward. I will now hand the call over to Brad to review our 3Q results. Thank you.

Thanks, Collin. Next I'd like to provide a short business update and then review a few items in our Q3 financial results. In our online games business, we've been transitioning with particular focus on web games and mobile games after that. Why web games? Well, let me share with you some market information. In Taiwan, web games have nearly tripled since 2009. By the end of this year, web games are expected to represent nearly 70% of all games revenues on the market. Driving this market shift is the popularity of play on online social networks and through tablets and smartphones which require light content. So, to keep our content relevant, we really need to have web games. Another benefit to adding web games is that it will refresh our content. Most of our revenues are generated by casual games that are more than three years old. Fresh, new content will help attract and retain users. We saw this start to happen in the third quarter. We launched one web game in 3Q which drove sequential increases in our total player registrations and in active players in the period. Let me now turn to our cloud business GigaCloud. As we have stated previously, we see strong growth opportunities in Southeast Asia for our SME cloud services, services such as hosted voice-over-IP and cloud faxing reduce costs, increase flexibility and drive SME productivity. They're popular and widely available in the US. However, in Taiwan and Asia, cloud services for SMEs are a largely untapped opportunity and lag the US in adoption. There are over 1 million SMEs in Taiwan and strong growth of cloud services regionally is forecast driven by SME need. GigaCloud is not a licensed product; it's self-developed. Our initial offerings will include a hosted PBX or phone system and hosted fax and cell phone service and office security camera and cloud storage. Basically, GigaCloud will enable subscribers to outsource their key IT and communications needs. It's a simple, efficient way for SMEs to upgrade their business and save money. We've made rapid progress developing the products and are currently doing our final internal testing. We plan to demo GigaCloud in mid-December and are on track for service launch in March 2013. Now let me briefly go over our 3Q results. Total revenues in Q3 were $7.2 million, in line with our forecast. During the quarter we concluded the disposal of a majority ownership interest in operations in Southeast Asia. The decrease in contributions from those operations was more than offset by game licensing revenues. The primary revenue contributor in the third quarter continued to be our online games business FunTown. FunTown's revenues were led by contributions from three areas, three games, Tales Runner, A.V.A. and Mahjong. The revenue mix of games operated by FunTown was approximately 54% casual games and 46% MMOs. During the period we launched our first web game. This strengthened user engagement in the period. Total new registrations grew 46% quarter over quarter and total active players grew 6% quarter over quarter. The game also had a positive effect on our ARPU which grew to $31.01 for all games in Q3 from $30.32 in Q2. Turning now to our costs, in Q3, operating expenses were in line with our expectations, decreasing to $5.8 million from $6.4 million quarter over quarter and from $7.6 million last year. The decreases reflected the impact of productivity initiatives that we began to implement at the start of this year. Operating expenses have trended down as we have reshaped our business model focused on bringing expenses for R&D, sales and marketing and G&A into alignment with our revenues. Operating cash inflow in Q3 was about $550,000 compared to regular operating cash expenditures in previous quarter of about $1.3 million. Non-operating income in the quarter was $6.8 million, and that included the following. First there was a gain on marketable securities of about $4.2 million that was related to sales of portions of our interests in game development studios. And two, there was also a gain on the disposal of investments of approximately $1.7 million, and that reflected our disposal of a remaining interest in our gambling operations. Net income then was $5.9 million in the third quarter. Finally, let me review our cash and our balance sheet. Cash, cash equivalents, restricted cash and marketable securities current increased approximately $3.5 million quarter over quarter to $98.4 million as of September 30. This was comprised of $63.4 million in cash, $34.2 million in marketable securities current, and about $740,000 in restricted cash. Short-term debt decreased approximately $1.7 million quarter over quarter to approximately $7.7 million. So, looking ahead, we remain focused on managing our cost structure and we will continue implementing initiatives to drive the revenue and profitability. We are well-positioned to grow Giga and we have sufficient financial resources to fund our business initiatives. That's our 3Q review and our business update for today. Thanks. Normally in our release or in our prepared comments, we would also give guidance on the fourth quarter. However, in light of the announcement we've made today about Collin joining us and the potential for changes in some initiatives, we need some additional time and we'll provide guidance later. For now, we can say that in Q4 we will benefit from moving our headquarters together with FunTown, which we recently did, and we'll also have a tax refund in Q4, approximately $0.5 million. So, tentatively, we see cash flow being about neutral in Q4. Before we proceed to Q&A now, a quick reminder, we recognize that you may have a lot of questions about future plans, but we appreciate your understanding that we will not be able to address those questions at this time. And as is standard protocol, we ask that you please limit yourself to one question and then we'll move on to the next caller. Operator, okay, we can begin the Q&A.

Thank you. [Operator Instructions]. And the first question comes from the line of [Eric Wu]. Please ask your question. [Eric Woo]: Yes, hi. Question on the accretive acquisitions you mentioned earlier, can you talk about what kind are you looking at and what areas? Is it going to be in the web games space or is it going to be in the cloud space?

Eric, thanks for your question. This is Brad. I think at this point we don't want to give too much direction on which areas. I think overall we've pointed that we're going to continue in online games, we're going to continue to transition that business with a focus on web games and then later mobile. We're going to continue to develop the cloud business. So we will continue on those two areas and I think we'll be looking potentially for acquisitions in those areas. But again, I don’t want to close off opportunities that may present themselves to us. I think we'll give people more of an update later once Collin has had a little bit of time. [Eric Woo]: Okay. You guys have quite a bit of cash and securities on hand, have you thought about ways of enhancing shareholder value and, say, buying back the stock at current prices?

Right. We do have a lot of cash, it's a good time to use the cash. Dirk has a few comments. Dirk the CFO has a few comments on -- we received a number of questions about this, about potential buybacks. So, Dirk, why don’t you go ahead.

Okay. Thank you, Brad. For the share buyback question, I think we have indeed looked at several different steps we could take to try to unlock shareholder value, that's including share buyback program. However, we face a number of restrictions if we want to do -- implement this buyback program. First, as a Singapore company, we have to comply with Singapore rules which state that buybacks are limited to 10% of all outstanding shares and the price will be limited to [105% of respective average for the previous] buyback. For GigaMedia, this means a limit of about 13,000 shares as of today. Under SEC rule, our buyback will need to be during an open window period, which for us means after the quarter and before December 21 this year, meaning that buyback will be limited to a total of [24 days] or only about 300,000 to 350,000 shares. In sum, I don’t think it seems to be an effective point for us at this moment.

Thanks, Dirk. [Eric], I think as Dirk was saying, there's a lot of restrictions that we face in terms of doing a buyback, because we're a Singapore company, we're restricted in how many shares we can buy back. And then, under US SEC rules, there's a window. So we're really limited in the number of shares we could buy back. It doesn’t look to be effective for us. And getting back to your question before about acquisitions, due to the market conditions around the world, a lot of valuations have come down. So this is a good time for us to be looking for acquisitions. And even though we are focused on the two areas that I mentioned, the games business and the cloud business, we won't turn away from other opportunities that we may find. So I think that's about all that we can say at this time. [Eric Woo]: And what are the marketable securities on your balance sheet? Are they all game companies that are publicly traded or what are these things?

Are you referring to the marketable securities current? [Eric Woo]: Yup. I guess both current and non-current.

Okay. Well, the current, those represent shares of a Korean company called JCE, which we've told people about before. We're in the process of disposing some of these shares. This goes back quite a while ago. Originally this was a strategic investment that we made. We believe there are strategic value -- there may continue to be strategic value for these shares as they give us rights to potentially valuable games for the online games business. That being said, we've been moving ahead with selling some of our holding of these shares. There are a number of internal and external policies and procedures that we have to follow when we dispose of the shares, and these can be somewhat restrictive. For example, in the past, we were prevented from selling during a period when we had insider information and we were on the board. Recently the shares of JCE, which are publicly traded on the Korean market and you can follow that, they've been very volatile, and that made the planning and execution of disposals very difficult, of course. Shares have recently decreased significantly. That's all happened very suddenly in a period of a week or two, I would say a week. There's no hedge related to this investment, but we're continuing to monitor it. There are -- it looks like there are several factors involved in the decrease in those marketable securities and the value of them. First, the Korean stocks in general, all the Korean gaming stocks have seen significant decreases recently. For example, NCsoft, the large, giant gaming company there in Korea, had seen a 30% decrease. Second, JCE has delayed the release of an important game called MapleStory Village. It's based on a hit game called MapleStory. That delay appears to be coming to a close. Competition is also growing in that market and JCE had a soft third quarter. But despite all of these, analyst reports that we've been reading, still positive with buy recommendations and still believe that it has good long-term growth prospects and good growth drivers from game launch -- a game launch called Freestyle Football which will be launching in China in 2013. And they have some new mobile games that will be launching as well, including this much-anticipated game MapleStory Village. So, long answer, JCE is the marketable securities. We're continuing to examine multiple paths to disposing of our shares, and we're carefully monitoring that situation. [Eric Woo]: Okay. And the gain on the sales of these in the income statement is JCE for the marketable securities?

The gain on the non-operating income, that was a disposal of part of our interest in a game studio in Korea. We haven't disclosed, for competitive reasons, we haven't disclosed the name of that. But we've disposed of a portion of our interest in a Korean studio. [Eric Woo]: Okay. And last question on GigaCloud, is the interest structure there set up for this cloud offering or how much do you have to spend to kind of build this out?

Well, I think the expenses involved in this are minimal. This is a fully-funded business already, so we don't anticipate heavy CapEx -- heavy spending on this business going forward. We're working with a number of big partners: Asus, a big computer manufacturer here in Taiwan, we're partnered with the big incumbent telephone operator here Far East Tone, and then of course our close partner here, financial firm Chailease. [Eric Woo]: Okay. All right, that's all I have. Thanks for your time.

Thank you.

The next question comes from the line of [David Bitterman]. Please ask your question. [David Bitterman]: Yes, hi, how are you? I just have a question for Collin. You're listed as Chairman of three other ventures in the press release. How much time are you going to devote to GigaMedia versus these other ventures?

Yes. This is a good question. I'm the Chairman of those three companies and I think it wouldn't take more than 5% of my time. I'll spend at least 95% of my time here. So it's like fully dedicated to GigaMedia. [David Bitterman]: Okay. They don't involve that much time, even though they sound like they're fairly substantial ventures?

We do have CEO and general managers for those companies, and those companies, some of them have been in the industry for more than 30 years. So we do have a lot of good professional managers there. No, I'm fully dedicated to GigaMedia. [David Bitterman]: Okay. Thank you.

Thank you.

[Operator Instructions]. And with no further questions in queue, I'd like to hand the call back across to Mr. Brad Miller.

Thank you very much. That's all we have for today then. For further information about GigaMedia or if you have questions and would like to contact the company, please visit our website at www.gigamedia.com. That concludes today's call. Thank you again for joining us.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.